One of the biggest stories in today’s IPO markets is the biotech SPAC boom. But what exactly is a SPAC? (special purpose acquisition company). Why are SPAC IPOs suddenly so popular? And will they forever change the way biotech companies access the public markets?
“Simply put, a SPAC is a blank check company,” says Amir Emami, RBC Capital Markets’ Co-Head of SPAC Coverage. “It works when a SPAC sponsor group forms an entity to raise capital in the public markets by selling units to investors. Those units are then placed into a trust account until a deal is announced, giving investors the ability to redeem their shares if they don’t feel that deal is right for them.”
According to Emami, that unique blend of upside potential and downside protection is one of several key drivers behind today’s SPAC boom in biotech. “It’s one of several distinctions from a regular-way IPO. Technically, it’s a merger. A public SPAC entity is acquiring a private company. When it does that, it files an S-4, which is different to an S-1, so you’re able to include forward-looking projections to communicate to public investors.”
Valuation certainty and validation
Jason Levitz, RBC’s Head of Healthcare Equity Capital Markets, flags another point of distinction – validation. “If you look at the biotech-focused SPACs,” says Levitz, “it’s no coincidence that many are sponsored by those same investors that lead crossover rounds and provide the third-party validation that broader public investors are looking for. So, as you think about the traditional crossover to IPO path versus the SPAC path, one consideration is the sponsor you’re working with in the SPAC; their ability to drive a syndicate of demand around a potential PIPE; and providing that third-party validation and valuation visibility that you’ll get as well, potentially, through the crossover to IPO path.”
Is a SPAC a silver bullet to going public?
So what does it take to be a successful IPO candidate compared to a successful SPAC candidate? For Levitz, it’s important to disabuse companies of the notion that the bar might be lower on the SPAC side.
“If a company isn’t ready to be public, it won’t be an attractive SPAC candidate,” says Levitz. “That’s particularly true in biotech, where it’s less about public market viability and more about quality of science, path to proof of concept, ultimate market opportunity, and third-party validation.”
Michael Ventura, Co-Head of RBC’s SPAC coverage, agrees. “Companies need be ready for the public markets across their business, regardless of the path they choose.”
“It’s a product that’s going to continue to evolve,” says Emami. “In the last two years we’ve issued more SPAC IPO volume than in the history of the market combined. In the first six weeks of this year, we’ve averaged roughly $1 billion of SPAC IPOs a day. 88% of those are less than six months old and have 24 months within which to make an acquisition.”
SPACs may not be silver bullets, but they have created a new fork on the road for biotech firms going public. Listen to RBC’s Pathfinders podcast to find out more.